What are reasonable breakage costs?

STUART JORDAN* elaborates on the consequences of the termination for convenience clause in contracts, citing a recent court decision regarding recovery of costs incurred by the contractor.

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CONTRACT termination tends to generate disputes - even when the termination is the exercise of an agreed entitlement to terminate for convenience, or "without cause" which is the subject of today's discussion.

Termination for convenience is a particularly common feature in construction contracts in the Gulf region, notwithstanding there are some potential issues as to enforceability of those provisions under local laws which we have looked at before.

For today, we're not looking at validity of the termination itself but at the consequences; in particular, the contractor's recovery of costs incurred (or commitment to incur future costs) at the point of termination. A common approach upon termination for convenience (or, indeed, following termination for owner default) is that the contractor is kept whole on the original bargain by entitlement to a sum in lieu of lost profit and overhead contribution from not performing the remainder of the works, together with sums reasonably incurred or committed to be incurred in expectation of completing the works. So, what would be reasonably incurred? A recent court decision looked at this.